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fact what is a bank a bank is a very simple thing people gather they put money in a bank that person goes and lends it that bank goes and lends it to some other people and they then hope to get paid back at a higher interest rate that's what it is and so when those people can't pay back because they don't have because that credit cycle starts to work in reverse and they can't pay back then the banks get in trouble they lose money and when they lose money then they're bad banks and the whole system works so you see that at the same time as there's a contraction in credit there is a stock market falling because you need to sell assets and because of the contraction and credits people are spending less earnings of companies go down so the companies are worth less and because of then the debt problems the banks don't do well so we have a banking crisis so you see that that de-leveraging happens and in the ways that we're used to happening the debt private sector debt doesn't increase uh spending is less uh banks get in trouble markets go down and so on and it's not enough money the central bank lowers interest rates interest rates hit zero they're stuck so that's a deleveraging and that's a that's a depression part of it deleveraging take the 30s take japan's deleveraging these are iconic deleveraging and rd leveraging at first um austerity is the path because you realize oh debt is a problem and what we all have to do is uh stop um getting into more debt that becomes obvious we can't continue to do that so we go through the austerity but as we go through that austerity there's a feedback loop because that was lack of spending that lacking of debt causes somebody's else's income to go down okay so then there's a there's a problem because of the debts so we go to we encounter a lot of debt defaults and we think about uh restructuring debts those debt defaults means okay how do we re-enter an agreement in which we can get past that that you can pay what you can afford and so there's a a debt restructuring a lot of debt restructurings but the debt restructurings also don't help because well they help to some extent but they they also bring with them problems because one man's debts are another man's assets so if i lower your debt let's say i'm when you do restructuring you can pay half your mortgage you come in we'll readjust your mortgage and you can pay half then i have to write down that mortgage and so my wealth goes down and as my wealth goes down i can borrow less and i can spend less so it feeds on itself so the problem is that there's too much debt relative to income so you can reduce the debt by having austerity and cutting your debt and that's good and that's deflationary and it's negative for growth because austerity means less spending and you can restructure um so that is deflationary and it's negative for growth and and so that produces a lot of pain at the same time so um like in the in the 30s 1929 stock market crash and you go through that and it keeps feeding on itself and it's not enough it's not good enough because it causes that self-reinforcing process and then eventually the central banks print money so in march 1933 which was the bottom of the great depression president roosevelt severs the link with gold and and prints money because money a debt is a promise to deliver money so if i can slip a little money into the system it eases that pressure the printing of money people think is inflationary and in and of itself it is inflationary but if it's happening at the same time as the other deflationary factors are happening so that there is still um austerity there a certain amount a certain amount of um restructuring or working out debts and the amount of printing so that they balance all three of those approaches have the effect of lowering debt relative to income so you can lower debt relative to income without having a you know a terrible situation it's still not this takes a long time they call it the lost decade um these countries go through lost decades it's usually more than a decade maybe 15 years but it's an adjustment process if done well in which there's the right mix between austerity not raising debt relative to income restructuring getting the debt payments in order and putting enough money into the system so you're seeing
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